Thursday, February 24, 2011

If gold (top chart) can't manage a new high despite soaring crude oil prices (bottom chart) and a chaotic situation in the Middle East, it would appear that gold has already priced in a whole lot of bad news (e.g., geopolitical turmoil and rising inflation). That in turn leaves gold very vulnerable to even the slightest whiff of good news. Caveat emptor.

According to the World Gold Council, that is who is buying the bulk of gold.

As such, the demand for gold is largely unrelated to monetary policies of Western nations, or political turmoil. When 2.5 billion people in emerging market economies want something, that is enough to explain price movements. They are not waiting for signals form us what to do.

Gold, however, is way below its 1980 high, adjusted for inflation. If you bought gold in 1980, you are down about half, and have collected no interest or dividends along the way.

Silver, now in mid-$30s, even in nominal terms is still below its 1980 price of $50 an ounce. Obviously, if you bought silver in the last fever, you have lost bigtime.

I suspect gold and silver have legs, due to the buying audience of upwardly mobile Chinese and Indians. They buy traditionally gold as presents for Chinese New Years in China and the Far East, for example.

But the whackiness of silver and gold prices completely destroys any sentiments that they should somehow stand behind currency. They are hazardous investment, subject to whims, fevers, speculation.

The next generation of Chinese or Indians may decide that buying gold is something their quaint but uninformed parents did.

i have decided to keep a small (+-5%) position in gold/silver on a long term basis. it just seems to offer a quasi-psychological cushion that is like a support tranche for my other risk assets. i have found that i have to sell to rebalance more than i have to buy.